Bar News - January 16, 2009
Modification of Irrevocable Trusts under the Uniform Trust Code
By: Erin Stearns
Irrevocable trusts typically cannot be modified or revoked after creation. Many practitioners face the need to modify the provisions of an irrevocable trust, because they have become outdated or unworkable due to changes in circumstance. The Uniform Trust Code (the "UTC"), RSA Chapter 564-B, which was first adopted in New Hampshire in 2004, offers a number of options for modifying irrevocable trusts. These include modification by court petition, Nonjudicial Settlement Agreements, and more recently, by decanting. The following is an overview of these options.
Modification by Court Petition
Any trustee or beneficiary may petition the probate court to modify (and in some cases, terminate) an irrevocable trust for the following reasons:
Modification is not inconsistent with a material purpose of the trust (see RSA 564-B:4-411(a))
Because of circumstances not anticipated by the settlor, modification will further the purposes of the trust (see RSA 564-B:4-412(a))
Continuation of the trust on its existing terms would be impracticable or wasteful or impair the trust's administration (see RSA 564-B:4-412(b))
The value of the trust property is insufficient to justify the cost of administration (note that a trustee may terminate a trust if the value is less than $100,000 upon notice to the qualified beneficiaries without court approval) (see RSA 564-B:4-
To correct a mistake of fact or law (see RSA 564-B:4-415)
To achieve the grantor's tax objectives (see RSA 564-B:4-416)
In the case of a charitable trust, if a particular charitable purpose becomes impossible, impracticable, illegal, obsolete, ineffective or prejudicial to the public interest to achieve (see RSA 564-B:4-413)
Where the trust is charitable, the Director of Charitable Trusts (a Division of the New Hampshire Attorney General's office) may also petition the court, and must be joined as a party to any petition for modification.
Nonjudicial Settlement Agreements
The UTC offers a flexible tool for modifying an irrevocable trust through a Nonjudicial Settlement Agreement ("NJSA") (see RSA 564-B:1-111). An NJSA offers parties a way to avoid the time and expense of going to court to have a petition approved.
An NJSA may be used for any matter that pertains to a trust, so long as the outcome of the NJSA could properly be approved by the probate court. The NJSA should clearly state the basis for the modification so that anyone who later reviews the trust will be aware of the changes made by the NJSA. The NJSA should be kept with the original trust document.
All "interested persons" to the trust must consent to an NJSA. The UTC defines "interested persons" as those "whose consent would be required in order to achieve a binding settlement were the settlement to be approved by a court." This definition is broad, and was intended not to limit the scope of matters that may be settled by an NJSA. As a result, the question of whose consent is needed to an NJSA arises often.
To the extent that there is no conflict of interest, a trustee may represent and bind trust beneficiaries except as to matters relating to the administration or distribution of the trust. Parents may represent and bind minor, incapacitated children where no guardian has been appointed for the child’s estate or person. Parents may also represent and bind their unborn children and descendants. An NJSA may be used where it is not possible to obtain the consent of all parties, as long as the interests of non-consenting beneficiaries are adequately protected. Where an interested party’s identity or location is unknown and not reasonably ascertainable, that person’s interest may be represented by and bound by another having a substantially identical interest in the trust. The Director of Charitable Trusts typically must consent to an NJSA if the trust is charitable.
Any interested party may submit an NJSA for approval by the probate court. This may be useful in a number of circumstances, such as where there is the possibility that an interested party may later change his or her mind and challenge the terms of the settlement, or where there is uncertainty that the terms of the NJSA can be approved by a court. Court approval of an NJSA will give parties added assurance as to the validity of its terms.
Trustee’s Authority to Decant
Effective September 9, 2008, New Hampshire became one of six states to allow trustees to decant irrevocable trusts. The New Hampshire decanting statute, found at RSA 564-B:4-418, is intended to be the most progressive and permissive in the country. While most commonly used in the context of wine, "decanting" as used here refers to the trustee’s ability to appoint all or a portion of the assets from one irrevocable trust into another. Trustees do not need court approval to decant. The decanting statute gives trustees considerable authority to appoint assets from one trust, the provisions of which may be outdated or unworkable, to a new trust with more favorable provisions. Reasons for which a trustee may decant include changing successor trustee or other administrative provisions or changing trust situs. A trustee is not prohibited from decanting property into a new trust solely because the first trust is irrevocable or provides that it may not be amended. A trustee may choose to decant a trust in instances where it is difficult or impossible to obtain the appropriate consents to a Nonjudicial Settlement Agreement, and where a court petition is disfavored.
Certain restrictions apply when decanting. For example, a trustee can only appoint property into a new, decanted trust if the interests of its beneficiaries will not be reduced in the decanted trust from what they were in the original trust (nothing appears to restrict the trustee from enlarging the interests of beneficiaries in the decanted trust). The decanted trust cannot contain beneficiaries who are not beneficiaries of the original trust. The decanted trust cannot reduce federal or state tax deductions or credits which were available under the original trust.
Additional restrictions apply to trustees who are also beneficiaries. For example, if the original trust contains an ascertainable standard for distribution (e.g., distribution can only be made for support in reasonable comfort, education, and maintenance in health), the decanted trust must contain the same ascertainable standard. Also, if the original trust prohibits the trustee from making distributions to himself or herself without the consent of a co-trustee, the decanted trust must contain the same restriction. Other restrictions apply which should be reviewed carefully prior to decanting.
The mechanics of decanting a trust involve creating a brief decanting document (a one- to two-page document that is separate from the decanted trust) to be executed by the trustee, which identifies the name of the original trust and the decanted trust and states the basis for decanting. The decanted trust instrument should be created and executed by the trustee. Where the original trust is non-charitable, the trustee does not have to provide advance notice to the beneficiaries of the decanting. Note that this does not change the requirement that the trustee provide notice to the qualified beneficiaries pursuant to RSA 564-B:8:813.
If the trustee intends to appoint property held by a charitable trust to a decanted trust, the trustee must provide at least 30 days advance notice to the Director of Charitable Trusts if at least one charitable organization or the Director of Charitable Trusts has the rights of a qualified beneficiary in the original trust. The decanted trust is a separate taxpayer, and must have its own taxpayer identification number. In deciding whether to decant, practitioners should always consider whether decanting will result in generation skipping, estate, gift and/or income tax consequences.
Erin Stearns is an attorney in the Trust and Estate Department at McLane, Graf, Raulerson & Middleton, P.A. She can be reached at firstname.lastname@example.org or 603-628-1325.